TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Wednesday, March 22, 2017

Shanske Presents Equitable Apportionment And The State Corporate Income Tax Today At Duke

Shanske (2017)Darien Shanske (UC-Davis) presents Equitable Apportionment and the State Corporate Income Tax: Past, Present and Possible Future at Duke today as part of its Tax Policy Workshop Series hosted by Lawrence Zelenak:

What a tough break for formulary apportionment. We are at a moment when there is apparently a real interest in reforming the federal corporate income tax in a way that, at least in theory, would broaden the base of the tax and encourage exporters. Shifting to the use of formulary apportionment with a single sales factor (SSF) could theoretically achieve these goals and there is at least one well-developed reform proposal to that end on the table. Moreover, over 40 states impose a corporate income tax and they have used formulas for a very long time, and so there is a track record and case law to work with. But this is not — yet — formulary apportionment’s moment.

This is the moment for the Destination-Based Cash Flow Tax (DBCFT), which relies on border tax adjustments (BTAs).

No doubt, there are many merits to the DBCFT with BTAs relative to a reform that relies on formulary apportionment; this paper addresses one reason that I do not believe is particularly strong. The authors of the DBCFT proposal seem to believe that formulary apportionment regimes are subject to relatively simple gaming. Though far from perfect, I will argue that the remedy of equitable apportionment is one means by which a formulary apportionment regime can be made fairly robust.

To this end, I will outline the history of equitable apportionment as used in state corporate income taxes and will argue that the doctrine has developed sensibly. I will then address current controversies involving equitable apportionment and will argue that they are eminently soluble and in any event do not indicate some fundamental weakness. Finally, I will note that the application of equitable apportionment can be refined. In particular, I will sketch out a methodology to improve the functioning of the most difficult part of the formula — the sales factor.

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